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Gold In Trade War

Surendra Mehta, National Secretary, IBJA

Recently, Indian Currency is experiencing huge vitality and currency has seen devaluation of nearly 8%.

The correlation between gold and dollar has been pretty much inverse since then with exceptions during certain periods. In correlation, a direct relationship means that value of two assets moves together while inverse means that they move in opposite direction.

The value of a nation's currency is strongly tied to the value of its imports and exports. ... Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country's total exports.

There are not many people in the world who will take gold for payment. The payment mechanism of money is conducted in the currencies managed by the central banks, regardless of whether the currency is the dollar, pound, yen, euro, franc, krona, dinar, yuan, peso, or something else. Gold is such an item.

That's because investors buy gold as protection from either an economic crisis or inflation. Low gold prices mean the economy is healthy. That's because investors have many other more profitable investments like stocks, bonds, or real estate. Much more than the laws of demand and supply affect gold prices

Investors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.

An increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.

When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency.

Many people mistakenly use gold as a definitive proxy for valuing a country's currency. Although there is undoubtedly a relationship between gold prices and the value of a fiat currency, it is not always an inverse relationship as many people assume.

For example, if there is high demand from an industry that requires gold for production, it will cause gold prices to rise. But this will say nothing about the local currency, which may very well be highly valued at the same time. Thus, while the price of gold can often be used as a reflection of the value of the U.S. dollar, or any currency, conditions need to be analyzed to determine if an inverse relationship is indeed appropriate.

Gold has a profound impact on the value of world currencies. Even though the gold standard has been abandoned, gold as a commodity can act as a substitute for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold will continue to play an integral role in the foreign exchange markets. Therefore, it is an important metal to follow and analyze for its unique ability to represent the health of both local and international economies.

Indian economy in the recent past is largely affected due to US – China trade warm resulting in devaluation of our currency. Under this situation government is left with no option but to keep check on rising import bills. Gold is one such sin commodity import of which needs to be controlled in our country, though we have passion for gold, the recent trade war also affected stock market, bond market, real estate market, etc. resulting in failure of few NBFC which further created liquidity crisis. This resulted in oil prices rising to 94 rupees per litre in few Indian Cities.

Time and again it has been seen that government restricts either import or increases the duty on gold without realizing the fact that 25,000 tonnes of household gold can easily be monetized through gold monetization scheme (GMS). The dependency on gold import can substantially reduce if GMS is implemented effectively.

While tax authorities refuses to budge on the collection of gold under GMS by sending notices to gold depositors, without realizing the fact that current account deficit (CAD) is more serious threat than tax revenue.

It is important that government tweak the GMS scheme by not issuing any notice to gold depositors and also incentivize banks to promote GMS scheme.

In our country the battle is always between policies of the government and approach of bureaucracy. This battle results in great suffering to the honest citizen, who otherwise would have contributed in GMS to check CAD. But the fear of tax authorities do not permit an honest citizen to do so.

 

Disclaimer: Views are personal and not the views of the publisher.